Nonprofit health insurers hoard surpluses, report says

SAN FRANCISCO (MarketWatch) -- Many nonprofit Blue Cross Blue Shield health insurers have amassed billions of dollars in extra cash in the last decade even as they hit their individual customers with double-digit premium rate hikes, a new study found.

Seven out of 10 nonprofit Blues plans held at least three times the amount that regulators require them to maintain for minimal solvency, according to a report from Consumers Union.

The independent group found that 10 Blues plans collectively held $9.1 billion in surplus funds in 2009, or about $855 per member per year. That's up from $4.6 billion in 2001, or $395 per member per year.

The plans ranged from Arizona holding seven times the benchmark minimum reserve level set by the National Association of Insurance Commissioners, to Alabama, which had about two and a half times the level that would trigger regulatory monitoring.

Meanwhile, Blue Cross Blue Shield of Arizona raised premium rates for individual policyholders between 14% and 19% in 2007; 13% and 15% in 2008; and between 8% and 18% last year, the report found.

Nonprofit Blue Cross Blue Shield plans cover about 100 million people, or about one in three Americans with private health insurance.

The companies should be able to strike a better balance in collecting enough premium dollars to cover their expected claims and grow their businesses while also offering the most affordable coverage they can to consumers, said Sondra Roberto, staff attorney at Consumers Union.

"Consumers are struggling to afford health insurance, and as nonprofits they should have as their priority providing affordable coverage for consumers," she said.

"If they are accumulating these [surplus] funds, which are collected through premium dollars, and holding them for purposes that are not designed to protect the company from insolvency, we want to know what those purposes are and whether it's in the best interest of consumers," Roberto said.

How much is enough?

Insurance regulators and Blues plans were quick to defend their cash stockpiles.

"State insurance regulators work vigorously to ensure insurance consumers are suitably protected," Alabama Insurance Commissioner Jim Ridling said in an emailed statement on behalf of the National Association of Insurance Commissioners.

"Financial solvency and consumer protection are two pillars of our mission," he said. "Artificially driving down surplus would only lead to more excessive (and unreasonable) rate increases downstream. I fail to see how that would help consumers."

Regena Frieden, spokeswoman for Blue Cross Blue Shield of Arizona, said the company stands behind its $717 million surplus.

"We believe our reserves are appropriate and in line with the financial risk that we take on behalf of our customers, as well as the 18,000 health-care providers that rely upon us to pay their claims," she said. "If we were to use the reserve money to buy down [premium increases,] it would merely be a temporary fix. It would do nothing to solve the ongoing problem of costs."

"We're focused on the affordability issue and looking for ways to reduce costs everyday," Frieden said. "There are significant challenges ahead of us, and we believe now is not the time to question the reserves Blue Cross Blue Shield plans like Arizona hold for the protection of their customers."

She declined to say when would be a better time.

Unlike for-profit plans, Blues plans don't have access to capital markets to raise cash, said Bob Kolodgy, chief financial officer for the Blue Cross Blue Shield Association in Chicago. They face significant costs from technology enhancement, routine and potential large-scale, catastrophic medical claims and unknown costs related to the health-reform law that takes full effect in 2014, he said.

In 2014, for the first time all Americans will be required to have health insurance or face a financial penalty. New insurance exchanges promise to let the uninsured, the self-employed and those in small groups buy standardized coverage, with premium assistance for the low- and moderate-income who can't afford it on their own. But health insurers are skeptical that the penalties are set high enough to persuade young, healthy people to buy coverage, Kolodgy said.

What's more, if 50 million members, or half the enrollees in Blues plans, had an extra emergency-room visit, the extra expense involved would consume the plans' reserves, he said.

Tighter scrutiny

State regulators, who set a minimum surplus standard to protect against insurers going bankrupt, should look at a possible maximum standard and examine the portion of premiums that contribute to the surplus as part of their rate-review process, Roberto, of Consumers Union, said.

"We want them to take a hard look at this issue and decide whether it's in the consumers' interest to keep paying these high premium rate increases when the insurers are very financially strong and there is really little danger of them becoming insolvent."

Consumers Union said plans with extra cash should use the money to offer customers a direct refund, set up a rate-stabilization fund to moderate future premium increases or funnel it back into charitable work such as community-health programs or affordable-coverage initiatives.

State regulators in Pennsylvania and Rhode Island have taken steps to rein in insurers' excessive surpluses, with Pennsylvania requiring refunds to subscribers if the reserve amounts get too high, Roberto said.

Insurance regulators should test plans' reserves at all points in the business cycle from profitability to loss and account for unexpected spikes in underlying medical cost growth, which have happened several times in the last 20 years, said Robert Laszewski, president of Health Policy and Strategy Associates, Inc., a consulting firm in Washington.

"A prudent regulator, in my opinion, will be doing stress tests," he said, to see if insurers suspected of having too much surplus could handle sudden cost growth, known as trend. "Redundant reserves become inadequate reserves overnight when trend takes off."

The report comes against a backdrop of public mistrust of health insurers in general. In February, Anthem Blue Cross of California, a for-profit subsidiary of health-insurance giant WellPoint
WLP
sought rate increases of up to 39% from its 800,000 individual policyholders, with an average rate hike of 25%. The move drew outrage and captured the attention of President Obama, who used it to urge lawmakers to pass the health-reform law.

Company executives defended the proposed hikes as necessary, citing medical costs and the recession resulting in more young, healthy people going without coverage and driving up costs for the remaining members. But a third-party actuary found significant mathematical errors in the insurer's calculations that forced Anthem to scale back its proposed rate hikes. Anthem's chief executive Leslie Margolin resigned from her post on Tuesday.

Mortgage Rates

Powered by

This advertisement is provided by Bankrate, which compiles rate data from more than 4,800 financial institutions. Bankrate is paid by financial institutions whenever users click on display advertisements or on rate table listings enhanced with features like logos, navigation links, and toll free numbers. Dow Jones receives a share of these revenues when users click on a paid placement.

Intraday Data provided by SIX Financial Information and subject to terms of use.
Historical and current end-of-day data provided by SIX Financial Information.
All quotes are in local exchange time. Real-time last sale data for U.S. stock quotes reflect trades reported through Nasdaq only.
Intraday data delayed at least 15 minutes or per exchange requirements.